Counseling and Coaching Through the Hierarchy of Financial Needs
The Hierarchy of Financial Needs lays out a clear and continuous path for your clients to achieve financial stability and reach their financial goals.
Hello Talking About Money Community, how are you?
Today I want to get back to basics in your role as a financial counselor or coach. In the first months of the pandemic when you were sent home to perform your job virtually, you may have done a hard pivot to providing your clients with assistance to meet their immediate needs, such as income replacement, food, and housing support. You may now be an expert (whether you like it or not) in filling out unemployment insurance, SNAP, and/or utility assistance applications.
Now that the immediate shock of the pandemic has subsided (though by no means is it over), you may be once again thinking about how to help your financially vulnerable clients to get ahead. After all, they first came to you with financial goals and dreams, and you and they both want to see those dreams realized.
When considering how to reach a financial goal, it is always helpful to have a roadmap to instruct you on how to get from Point A to Point B. While not a road map per say, this Hierarchy of Financial Needs from Visual Capitalist does provide a comprehensive picture, fashioned after Maslow’s Hierarchy of Needs, on how to progress from Basic Needs to Legacy.
I find this graphic useful because so many of my clients come to me with dreams of reaching the “Financial Freedom” stage of the ladder without first considering the foundation on which they need to build. Let’s take a deeper look at the Hierarchy of Financial Needs to see if you and your clients are considering all the steps they need to reach their own version of financial success.
Cash Flow and Basic Needs
Food: Food comes first on the hierarchy of needs, and it should, as without food you would perish. But to avoid frequenting food pantries and applying for SNAP, your client needs enough stable income to be able to provide for their household. In this sense, income is the true base of this hierarchy. 2020 has been the toughest year in recent memory for folks at the bottom of the earnings scale, as they have been hit the hardest by the economic fallout of the pandemic. Folks who have been middle income workers are starting to see their jobs disappear too. Jobs that are still being hired for include chain restaurants, warehouses, manufacturing, and retail and grocery stores, jobs that require workers to be on-site, thereby elevating their risk for exposure to Covid-19.
Housing: Housing is next on the list, and most likely for the clients that you serve, this means stable and affordable rental housing (as home ownership is higher up on the hierarchy). Inequities in housing is not new news, but has been exacerbated by the global pandemic. Problems like developers crowding the higher end of the market, escalating construction costs, stagnating wages, and vulnerable service-sector jobs makes finding and keeping affordable housing all the more difficult.
Transportation: Reliable transportation choices vary based on where you live, ranging from comprehensive public transportation networks in major metropolitan areas, to the ability to purchase and maintain a private vehicle in rural locales where public transportation isn’t an option. With the pandemic raging across the country, public transportation systems are reducing their service, leaving workers with fewer choices to get to their jobs.
Financial Safety
Emergency Fund: Once basic needs have been taken care of with secure and stable employment, your clients can then turn their sights to working on their financial goals. The first task to undertake is to build and maintain an emergency fund. While most dispensers-of-advice dictate that a person should save 3-6 months’ worth of income, I ask my clients to come up with an example of a financial emergency that they can see themselves realistically encountering, and then ask them to assign a dollar amount to it. This amount becomes the initial savings goal for an emergency fund.
Insurance: Many of your clients might feel that insurance is not that necessary for them, “because I just don’t have that much.” Does this sound familiar to you? What I like to remind my clients is that in fact, they do possess something that is most important to them living a comfortable life, and that is their health. Therefore, things like health and disability insurance are super important for your clients if they want to reach their financial goals, as medical expenses are the top reason why people file for bankruptcy.
Accumulating Wealth
Saving for retirement: One of the reasons why I like this Hierarchy is that it places Saving for Retirement right after Insurance. Why do I like this, you might ask? Compound interest, of course! While 21 states now require high schoolers to take financial literacy in order to graduate, that means that 29 states have no such requirement. If I could wave my Taking About Money magic wand, I would open a Roth IRA for every American once they turn 18 and set it to monthly auto-transfer. Then in a short 50 years, they would have money to retire!
Paying down debt: Now we get to the point in this post when we talk about paying down debt. But you noticed that we discussed savings, insurance, and retirement first. Happenstance? I don’t think so. I like to see my clients (and your clients, too) get their financial houses in such a state where they already have the income, emergency savings, and insurance necessary to mitigate any financial emergency that comes their way, reducing the need to plunge further into debt. Once your client is no longer adding to their debt burden, they can take active steps to reduce it. PowerPay is a great place to start.
Financial Freedom
Home Ownership: Ah, now we are finally at the stage of the Hierarchy of Financial Needs called “Financial Freedom”! Whew, it took us long enough to get here! And here is where I am inserting Home Ownership. Why did I wait until this point to introduce home ownership? Your clients may be just beginning their ascent of the hierarchy when they come to see you, and home ownership is their dream. And you want to help them realize that dream too. I get it. I’ve been teaching home buying classes for 20 years and I’ve have many students just like your clients. But I also want my students (and your clients) to build their homes on the firmest of foundations (get it?), so I want them to have the stability of income, savings, asset protection, retirement savings, and minimal debt burden before they put themselves in the position of maintaining a home.
Children’s education: In a recent survey, less than half of those polled had set up a college savings account for their child. While 529 plans offer various investment options for families who wish to take advantage of the compounding effects of such investment vehicles, few families have them. One growing trend to watch out for are Children’s Savings Accounts, or CSA’s, to help families to save for college. The accounts tend to be offered by government agencies, so if you have never heard of them, look them up.
Vacations: Ah, to have the resources – and negative Covid test – to go sit on a beach and sip a drink with a paper umbrella. I can imagine the sand between my toes and the waves gently lapping nearby. And once your clients have climbed to the top of the Hierarchy of Financial Needs, they can imagine this too. Enjoy.